Company Accounts Summary

CMA INTER COMPANY ACCOUNTS NOTEBOOK
a) I, CA Avinash Sancheti, present to you this Notebook cum summary module

for CMA Inter Company Accounts.
b) This module will help you to revise the topics as and when you wish with
minimum efforts and maximum coverage.
c) The module also covers the important theoretical aspects of chapters so

as to ensure full coverage.
NAVIN CLASSES CA AVINASH SANCHETI

PAPER PATTERN
1. OFFLINE MODE:
a) Question 1 Compulsory - Objective type (14 marks)
• MCQs - 6
• True False - 4
• Match the following - 4
b) Question 2 to 5 - Subjective type (12 marks each)

• Answer any 3 out of 4
• Question 4 - Short notes (Any 3 out of 4)
2. ONLINE MODE:
a) Question 1 Compulsory - Objective type (14 marks)
• MCQs - 6
• True False - 4
• Match the following - 4
b) Question 2 to 4 - Subjective type (12 marks each)

• Question 2 & 3 will have internal choices
• Question 4 Compulsory - Short notes (Any 3 out of 4)
• Practical questions will be sub divided into MCQs
• Answer for Theory questions - Typing based

CONTENT & WEIGHTAGE
Sl. No. Chapter Marks Type of Qs

1 Basics Concepts related to Company - -
2 Issue & Forfeiture of Shares 5-7 Practical
3 Underwriting of Securities 5-7 Practical
4 Bonus & Right Issue 5 Practical
5 Redemption of Preference Shares 5-7 Practical
6 Buyback of Shares 5-7 Practical
7 Issue & Redemption of Debentures 7-8 Practical
8 Company Financial Statements 12 Practical
9 Cashflow Statement 8 Practical
10 Banking Company 5 Practical
11 Insurance Company 5 Practical
12 Electricity Company (ICMAI Mat) 5 Practical .

BASIC CONCEPTS RELATED TO COMPANY
1. WHAT IS A COMPANY?
A comp.am is a
form of doing business like Poop .
. Partnership
etc d under the
It is an
entity formed registered
.
poor of Companies Act .

.
2. FEATURES OF A COMPANY:
a) Separate legal Entity from its owners ( shareholders)
b) limited liability of members
c) Separation of ownership d
mgr
d) Transferability of shares
3. LAWS APPLICABLE TO A COMPANY:
d d b b d d
listed entity financial sectoral other Tax

companies
Act L business regulations business regulations
d regulation
SEMI
RBI

4. SOURCES OF FINANCING A COMPANY:
d d
traditional sources
=
company specific
I
a) loan
from banks , relatives .
d d
owners ,
others etc .
short-term longterm
;
=
a) Commercial papers a) Shares
b)
Deposits b) Debentures

5. SHARE & SHARE CAPITAL:
Total capital of the company is divided into a number of small indivisible units of a
fixed amount and each such unit is called a share & the capital is known as Share
Capital. ↳ Face value
The fixed value of a share, printed on the share certificate, is called Nominal/
Par/Face value of a share.
6. TYPES OF SHARE CAPITAL:
€0
Equity Share Capital
( ordinary shares)
Preference Share Capital
d
& The holder
of preference shares
shares other than preference will have the

following three
shares .
preferential rights : -
b (a) Fixed late

of dividend
Voting rights of the
✓ our
profits of co .
Residual
✓ interest
before anypayment of
dividend to equity Shonen .
(b)Priority in repayment of
capital at the time of
winding up before eq shovels -
.
fixed maturity ie they

(c)
.
will be redeemed at the end
of a
specified period .
I
No
voting rights
•
No
right to participate
•
in surplus profits
→
7. LAYERS OF SHARE CAPITAL:
a) Authorised Share Capital: It is the maximum share capital
with which a co . is
registered . It is mentioned in
the
capital clause of MOA It is .
also known as
Nominal /
Registered share capital .
Avsc = ( Max .
shares on
per cap clause A)
face value]
b) Issued Share Capital: It

refers to the shares
no
of
.
offered by the co .
to public
/ investors for subscription
exceed Authorised
It cannot capital .
ISC =
( shares offered for subsea 4) Face value]
c) Subscribed Share Capital: refers

It to the no .
of shares
subscribed by the public / investors d allowed to them .
SSC -
.
[shares attuned ☒ I face value]
d) Called up Share Capital: the

portion of subscribed share cap .
called
by company for payment is known
the as
up
called share
capital
up
.
shares allotted Called up portion

(
CSC ④
]
=
face value
Of
e) Paid up Share Capital: The portion of called up Sh .
Cap .
paid by the shareholders is called paid up sh Cap .
Psc =
(shares atoned 1×1 Paid up portion of
called up value ]
OR
[called up shcap (→ calls in arrears ]

8. DEBENTURES: ( instrument)
(a) Debenture is an
acknowledgement of debt due to the
company .
(b) It is an instrument which a co .

uses to raise
funds
in the nature
of toan .
④ Three characteristics :
"
a) Periodical
fixed Interest whether or not
co.tn#profis.--
b) Repayment of principal at the end of specified

period
c) Priority repayment at the time

in of winding
up on
they are lenders / outsiders .
1.d) No voting rights .
financial
9. statements
of a
company : -
'
d d d d d
Balance statement Statement
Sheet
Cmhflow Notes
+0
of Profit statement of changes
AM .
or loss in
Equity

SPACE FOR SELF NOTES

Read section 43 , 52,53
ISSUE & FORFEITURE OF SHARES ( 2- 3 monks)

1. GENERAL CONCEPTS:
a) Reason for Issue of Shares:
a) To
gather funds for
business → Issue
of shares
for conhcomid .
}
To asset
b) acquire an
4 To
acquire a business → Shares issued for consideration
other than conn
d) to
repay a liability
b) Issue price:
The price payable by shareholders for the shares subscribed by them is
known as Issue price of shares. It is the price at which company offers ist's
shares for subscription.
¥80
Issue price of Shares
Issue at Par Issue at Premium Issue at Discount

a b b
Issue Price : face value Issue Price > face value Issue Price < face value
d d tr
face value :
£10 The extra amt read It is prohibited on
d
Issue Price : £10 is a
capital profit per Sec 53
.
on Sec 52 it shall d
per
te credited to see Prem Ak
- -
face value -
- £-10
d issue Price : £-8
face value : £-10
Issue Price : £12

ISSUE & FORFEITURE OF SHARES
c) Securities Premium: ☒☒☒
shares Deb/
/
.
When a company issues its securities at a price more than the face value, it
is said to be an issue at a premium. Premium is the excess of issue price
over face value of the security.
When shares are issued at a premium, the premium amount is credited to a

separate account called “Securities Premium Account” because it is not a
part of share capital. Rather, it represents a gain of a capital nature to the
company.
Securities premium Account is shown under the heading, “Reserves and

Surplus”. However, ‘Reserves and Surplus’ is shown as ‘shareholders’ funds in
the Balance Sheet as per Schedule III.
According to Section 52 of the Companies Act, 2013, Securities Premium

Account may be used by the company for:
B- Issue
of fully paid Bonus shares
P - writing off preliminary exp .
D- n n
Discounts or
expenses on issue
of shares Deb / .
P- Writing off Premium

of Redemption of Pref sh .
/ Deb
B-
Buyback of equity shares
AS under section it cannot

However ,
if a 10 .
follows 133 ,
use
SP for two P 's .

2. PROCEDURE FOR ISSUE OF SHARES TO PUBLIC:
Company prepares
a
Prospectus
prospectus is circulated to the public

&
Issue Public to subscribe
opens
makes
application
for the shares
of the co .
by paying application
money .
I
All applications herd .
by the co .
are
analysed
d d d
oversubscribed under subscribed
Issue is
fully subscribed
d d d
shares applied : shares offered Applied > offered Applied < offered
I t ✓ is
Allot shares to subscribers Allot shares to subscribers min subs . Min subs .
recd notrecd
d . .
Excess money can be (390%1 490^1)
refunded or
adjusted d &
(Proraha) Allor shares Refund

☒ A full
d appii .
G. calls the balance money

money
d
shareholder pays the call money

3. ACCOUNTING FOR ISSUE OF SHARES:
a) Application money received:
{
Min
appt: → ( No
Money : -
Bank Afc applied ✗ Appti. money / Sh)
.
of Sh . ✗ ✗ ✗
cos Act → b-i.

of FV To
Equity Shone Application A/c
SEBI → 25% of IP
b) Shares allotted to shareholders:
share
Equity Appli . A / c-Dr
to
Equity share
Cap .
Afc
( No .
of shares atoned ✗ Appt i. money / Sh )

c) Refund of excess application money:
Equity share App .

A
/ c- Dr
to Bank Ale ( shone appt : refunded ✗
Appt i. money/Sh)
d) Allotment money called up:

Allotment A/c
Eq Sh the / No
of Sh atoned ✗ Allotment money Ish)
. .
.
.
To kq.sn Capital A/c .
to Sec .
Premium Ale
e) Allotment money received:

Bank Dr Ish allotted ✗ Allotment money / Sh)
Afc
.
-
F. Allotment Alc
g. shone
to
f) 1st Call/Final Call money called up:

Call Afc Dr Ishi allot ✗ call money Ish)
f.
qsh
-
.
To
Eq Sh .
Capital Afc
g) Call money received:

Bank Ale -
M
Eq Sh Call
to . .
Afc
* min time two calls -7 1 month
gap between
-

# Important concepts:
Concept 1: Calls in arrear:
Sometimes shareholders fail to pay the amount due on allotment or calls. The
total unpaid amount on one or more instalments is known as Calls-in-Arrears
or Unpaid Calls.
Such amount represents the uncollected amount of capital from the

shareholders; hence, it is shown by way of deduction from ‘called-up capital’
to arrive at paid-up value of the share capital.
Journal entries:
a) Non payment of Call:
Calm in arrear Alc
-
Dr
to F. or . Sh .
Call All
b) Payment of unpaid amount with future calls:

Bank A
/c -
M
to calls in arrear Ale

Interest on Calls in arrear:
(a) if the AOA authorizes ,
the
company m⑨ collect Interest on
calls in arrear .
(b) Such interest is an income for the company .
(c) Journal :
In Shareholder A cm
/
to Int on Cath in arrear Ali
(2) Bank Afc -
m
to shareholder Ak
(d) Max rate of Interest :

101 P.a. .

Concept 2: Calls in Advance:
Some shareholders may sometimes pay a part, or whole, of the amount not
yet called up, such amount is known as Calls-in-advance. This amount is
credited in Calls-in-Advance Account. When calls become actually due, calls-
in-advance account is adjusted at the time of the call.
MPOItCurrent
is shown in Balance Sheet as a Current liability under the head “Other
Liabilities”.
Journal entries:
a) Receipt of advance:
Bank Alc - Dr
To calls in advance AK
b) Adjustment of advance when Call is finally made:
Cath in advance Alem
TO Eq .
Sh . Call All
Interest on calls in advance:

I. if AOA authorizes ,
the co .
sh⑨ pay interest on calls in

advance to the shareholder .
2 . It is an
expense for the company .
3 .
Journal 1 ?
-
28€
a) Int -
on calls in Adv .
Alek f
To shareholder Ale
1.4
b) Shareholder Ak -
m
to Bank Alc
4. Max rate
of Inherent 12% p a
. -
.
5. Period of Inherent -
from date of payment of Adr .
till
Final call Due date of call
NAVIN CLASSES
=
¥2
-
2④ CA AVINASH SANCHETI
?⃝
☒ 4. FORFEITURE OF SHARES: A
The term ‘forfeit’ actually means taking away of property on breach of a
condition. It is very common that one or more shareholders fail to pay their
allotment and/or calls on the due dates. Failure to pay call money results in
forfeiture of shares. Forfeiture of shares is the action taken by a company
to cancel the shares.
The directors are usually empowered by the Articles of Association to forfeit

those shares by serving proper notice to the defaulting shareholder(s).
When shares are forfeited, the title of such shareholder is extinguished
but the amount paid to date is not refunded to him. The shareholder then
has no further claim on the company.
Journal entry:
Equity Share
Cap Afc -
Br f face value ka called up portion
Sec .
prem
.
A Kbr .
f if not paid by shovels ) .
calls in Ale ( Amt

To arrear
unpaid)
to share
forfeiture Afc ( face value ka paid up
portion
Reissue of forfeited Shares:

A forfeited share is merely a share available to the company for sale and
remains vested in the company for that purpose only. Reissue of forfeited
shares is not allotment of shares but only a sale.
These shares can be re-issued at any price so long as the total amount
received (from the original allottee and the second purchaser) for those
shares is not less than the amount in arrear on those shares.
Max Discount = Amt forfeited on shares

Journal entry:
→{
Bank Ale -
Dr
( shares reissued A) Amt seed ) 9/6
5h.
for f- Ale on Cif reissued at discount)

1/2
TO f. qsh .
Cap Ak Ish .
reissued ☒I paid up value)
→
to Sec .
Prem (if reissued at
prem ) 1018
.
forf.A1creIahedtoseissvedsha@shallbetsrfdtoCap.Re
Once the shares reissued bat in share
are any
.
serve .
Share for f- Ak M ✗ ✗
-
to Cap Reserve AK ✗
.
✗
1 No of Sh reissued µ ) Bal of for f- Ak Ish) -

.
a
( Amt forf- f) Disc ) .
{ }
the amt .
of sh .
for f. pertaining to unissued shares will
remain on a bat .
of share
forf. All . It will not be trfd
to
cap .
Reserve AK .
Bl! "
cap .
Reserve :
Reserves d Surplus
shr for f- Afc boy =
shown on an addition to paid
Important point for consideration: up sharp .
1. Loss on re-issue should not exceed the forfeited amount.

I2. If the loss on re-issue is less than the amount forfeited, the surplus
should be transferred to Capital Reserve.
3. The forfeited amount on shares (amount originally paid-up) not yet

reissued should be shown under the heading ‘share capital.’
4.
- When only a portion of the forfeited shares are re-issued, then the
profit made on re-issue of such portion of shares only must be transferred
to Capital Reserve.

5. PRORATA ALLOTMENT:
When the shares are oversubscribed, the company cannot satisfy all the
applicants. It means that a decision is to be made on how the shares are
going to be allotted. Shares can be allotted to the applicants by a company
in any manner it thinks proper.
Reject all excess Prorata Allotment Category wise

applications to all applicants Allotment
Under pro-rata allotment, the excess application money received is adjusted

against the amount due on allotment or calls. Surplus money after making
adjustment against future calls is returned to the applicants.
Computation of excess money received to be adjusted against Allotment:

Shares atoned FV -2-10 IP
A.g. to be : 80000 : = 2=10
d
Applications recd for 1,20 , nosh
App -
3
AM -
y
cone ? :( o made
pro rata allotment to all 1,20000 shapphi .
Call -
3
Apple money recd : 1,20000×3=2--360000
allured Soooo
No
of shares =
APP
.
3
i. Amt recd / Sh allowed =
£-3 , bad
800W
iii. g- 2=1-5 Allt
lone ? : to
rejected 20000
appli . d made pro rata allotment for the bae : -
Appli .
money seed 1,20000 ✗ £3 : a £360000
+, f. ✗ can
appt refunded 20000 ✗ £3
⇐z%[
. = :
→ , , ✗ £3
No
of shares atoned soooo
IF2- 75APP
}
Amt recd shall oped / :
£-3.75
•
Allt .

Journal entries: Cme
? "
Ñ°°°° -112×3
Bank Afc - Mr (1,20000×2--3) 3,6 oooo ↳ soooo]
F- 3,60000
TO
g. Sh
.
App / i. A/c
f- qsh 3,60000
App All
.
To Bank Ale (20000×2--3) 60000
To Iq Sh Cap Ak 18000011£37
. 2,40000
* 60000 *
to forth Allt Afc (80000×2--75)
Forfeiture of shares issued under Prorata Allotment basis:

a) The
journal entries will remain same as
before .
b) Only if the shareholder has failed to pay allotment money,
don't forget that he has already paid a portion of allotment

time and in
money at the
of application
so calls arrear
&
forfeiture shall be
computed w.at actual ant recd
on
application .

6. SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH:
Public limited companies, generally, issue their shares for cash and use such
cash to buy the various types of assets needed in the business.
Sometimes, however, a company may issue shares in a direct exchange for
land, buildings or other assets. Shares may also be issued in payment for
services rendered by promoters, lawyers in the formation of the company.
Shares issued for purchase of Assets:

shares consideration
No
of to be issued payable
.
:
Issue price / Share

Journal :
-
Asset Afc the ✗ ✗
TO vendor A/c ✗ ✗
vendor Alem ✗✗
✗ ✗
To f- Wish Cap . .
Ak
TO Sec .
Prem .
Ali ✗✗
Shares issued to promoters for past services:

Goodwill / Preliminary F-
xp Ali
. -
Dr ✗✗
TO Promoters Ale ✗✗
Promotion Alc -
m ✗✗
✗✗
to F- qsh .
Cap All
To Sec .
Poem .
Ale ✗✗


UNDERWRITING OF SECURITIES
1. UNDERWRITING:
It is a contract between a company issuing shares to public and an agency
called underwriter whereby the underwriters agrees to sell the shares of
the company to the public in return of underwriting commission.
The underwriter also agrees that if shares are not subscribed by the public,
he will take up or subscribe those shares himself.
2. TRANSACTION STRUCTURE:
commission
shares to be
Issues
Underwriters , ¥
co sold to
¥ ¥
.
&
r Issue
price
shares with a
promise if
Public
subscribed shares not subscribed
by
them by public , they will
subscribe the shares
Air
3. UNDERWRITING COMMISSION:
a) It is an expense for the company and income for the underwriter.
b) As per Companies Act, underwriting commission can only be offered on
shares issued to public i.e. if shares are issued to promoters or directors of
the company no underwriting commission shall be paid on those shares.
c) Underwriting commission is to be paid on shares underwritten by the

underwriter respective of the shares subscribed by the public.
d) Unless otherwise said, underwriting commission shall be paid on the issue
price of shares or debentures.
e) Maximum underwriting commission as per Companies Act:
On Debentures - 2. it of Issue price | On Shares - 5% issue price
of
4. JOURNAL ENTRIES:
a) Application money received:
Bank Afc Dr (180000×2--120)
- ✗ ✗
To F. qsh ✗ ✗
application Afc
b) Allotment of shares to Public & Underwriters:

f- qsh App .
Afc Mr (1,80000×120)
Underwriters Ali or (20000×120)
To F- Wsh Cap Alc (21×4--100)
to Sec Prem Ali (21×2--20)
.
c) Underwriting commission due:

Underwriting Comm Alem . 12in on
to underwriters A/c 121W an
121×120×5-1 ] .
f)
d) Final settlement with Underwriters:
Bank Afc -
oh Underwriter Alcor
To underwriters AK To Bank Ale
underw7
( Amt receivable from [ Payable]

vnuve.fm#
5. COMPUTATION OF NET LIABILITY OF UNDERWRITERS:
Individual Underwriting 0¥ Group Underwriting

(One underwriter) (Two or more underwriters)
Full Partial Full Partial

Underwriting Underwriting Underwriting Underwriting
(Full issue size (Portion of issue (Full issue size (Portion of issue
-
underwritten) size underwritten) underwritten) size underwritten)
# Concept of Marked & Unmarked Application:

a) Marked Applications -applications bearing stamp or monk
the
"
of underwriters are known as marked applications The

"
.
credit
for such applications shall be given to the
respective underwriter .
b) Unmarked Applications - The which does not bear

applications "
unmarked
"
known
any stamp or mark are as
application .

# Liability in case of Individual Underwriting: Issue price : £20
Case 1: Full Underwriting: Comm :

Éf
If the whole of the issue has been underwritten by one person, he is
responsible to subscribe for all the shares or debentures that have not
been subscribed by the public.
Liability of underwriter (in shares) = Unsubscribed portion

Issue size : 1500005h .
, wholly underwritten by Mr .x shares subscribed,
1,49000 Sh liab of underwriter

by public : . . looosh :
(150-149)
Note: In such a case, it is not necessary to know the number of
applications which had originated through the underwriter and those
which had flowed directly to the company. two marked
segregation of
or unmarked applications)
Case 2: Partial Underwriting:

In such a case the company is treated as having underwritten the balance
of shares which have not been underwritten.
Liability of underwriter (in shares):
F- Issue Underwritten portion 80%
f. size : i. Swoosh
, by Mr ✗ - :
Applications read a
1,350005h → Marked 1,100W ,
unmarked -2500 .
Particulars Mr:X Ce .
Gross liab . 1,20000 300W
e) marked appt
HYM)_oow
credit
given to Mr ✗ -
foon
-
.
E) Unmarked n -
credit given Co
1st to .
-
125000)
d any excess
given to underwriter
Netciab
Note: If there is no segregation of Marked & Unmarked applications, then

.
=)
to be
In
É
underwr.wiifzeffsa.in
04
s#h
total applications received shall be distributed between underwriter and
company in ratio of their Gross Liabilities.

# Liability in case of Group Underwriting:
Case 1: Full Underwriting:
Liability of each underwriter = Gross
{ liab f) Applications seed
behalf
- on his
}
Distribution of applications among Underwriters:
a) Marked applications - credit for such applications shall be
given to
respective underwriter
b) Unmarked applications - credit all underwriters in
given to
Gross liabilities
ratio
of
.
Statement showing net liability of Underwriters (in shares):

Particulars A. B E Total
Gross liability 2.wow 2.Wow nooooo 5. war
f) Marked 11,8Mt ( Hoon ) How) Hirono
applications
( credit to indiv vnderwt
-
Toooo Toooo ¥ To
⇐ unmarked applications -1480 -4W) 42mg 132M ) 11bar ) @oooo)

:D
'
(credit to all underw.ir ?"
Juno I
How ( Morro)
surplus of trfdtoc
ADB 2W -
Net liab .
I I Torre Torre
Important notes:
a) Excess applications in column of an underwriter - these surplus applier
shall be distributed among other underwriters in the ratio
Gross liability
of their .
b) Alternative technique for distribution of Unmarked applications -

Case 2: Partial Underwriting:
Distribution of applications among Underwriters including Company:
a) Marked applications - credit
given to
respective underwriter
any excess
b) Unmarked applications - credit
given 1st to co . d then go
underwriters in al
ratio
of .

Particular A B E Ce .
Total
Gross ✗✗ ✗✗ ✗ ✗ ✗✗ ✗✗ ✗
liab .
is marked app .
✓ ✓ ✓ -
xxx
unmarked app ✗✗ XX XX
+ " XXX
nF✗ÉdeÉn
Nettiab .
→ ✗✗ ✗✗ ✗✗ ✗✗ xxx
Important notes:
a) Excess applications in column of Company - Allocated to underwriters
in ratio their GL
of
.
b) F. Men
applications in column of underwriters -
Excess allocated
✓ 1st to co d then excess to remaining underwriters

any
.
in ratio their GL
of .
fame owned
onvnmapplic
'

6. CONCEPT OF FIRM UNDERWRITING:
It signifies a definite commitment to take up a specified number of shares
irrespective of the number of shares subscribed for by the public.
In such a case, unless it has been otherwise agreed, the underwriter’s
liability is determined without taking into account the number of shares
taken up ‘firm’ by him.
The underwriter is obliged to take up:

(i) The number of shares he has applied for ‘firm’; and
(ii) The number of shares he is obliged to take up on the basis of the
underwriting agreement. ( unsubscribed portion
)

A- B. c-
Gross liabftotallssvesize) ✗✗ ✗✗ ✗✗
(xx) (xx)
" firm
underwriting /Refer Next (xx)
PH] XX XX ✗✗
shares to be sold to Public
1×11 ) ( xx) (xx)
1-
lmonkedapplic .
✗✗ ✗✗ ✗✗
IXX) ( xx) ( xx)

* unmarked appli .
XX XX
Netliabilitybeforefirmvnd . XX
☒ firm underwriting ✗✗ XX XX
(
Netliab .
✗✗ XX xx
lfunderwrinerhm made applicationfor firmunderw portion .
it shall not be
with
public ,
then added here .

Important notes:
a) Credit for Firm Underwriting Portion -
be
1. Generally ,
credit
for firm underwriting portion will fire n
on marked applications i. e. to individual underwriter on
the basis
of
their own firm vnderw .
portion .
2. However , if question specifies ,

then credit may be given
as
unmarked 107]
appli.ie in ratio
of Gross liab
.
.
Papa
¥5
.
¥
r*¥÷ d
¥
livest
b
?⃝
BONUS & RIGHT ISSUE
1. MEANING OF BONUS ISSUE:
Bonus issue means an issue of additional shares to existing shareholders
free of cost in proportion to their existing holding.
Important points to remember:
a) Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of
profits refers to the process of converting profits or reserves into paid
up capital.
b) No new funds are raised with a bonus issue.

c) Although the total number of issued shares increases, the ratio of
number of shares held by each shareholder remains constant.
d) While the issue of bonus shares increases the total number of shares
issued and owned, it does not increase the net worth of the company.
shares
New
for free
>
f company
]
shovels
Existing .
Reserves N Sh R
r No -
of
th -
Capp No Consideration Addtnlinv : Nil
Avglostoflnvwill
decreme
3. BONUS RATIO:
I bonus I bonus sh 2 held
:2
for every 3
eqsh
2 :3 =)
n
2 • n n
n n n u

BONUS & RIGHT ISSUE
4. PROVISION OF SECTION 63:
a) Sources of Bonus issue:
111
Capital Red . Reserves
② Capital Reserve (m per SEBI)
131 Sec .
Prem .
* free reserves :) a) GR , b) PIL .
* However .
Revaluation reserve cannot be used .
* As
per SEBI ,
only reserves made our
of genuine dconh
profits can feed
b) The existing shares must be fully paid up. If shares are partly paid,
Final call must be made and received before issue of bonus shares.
c) Other conditions:
1) Authorised by articles;
2) OR in GM;
3) No default in payment of statutory dues of employees;
4) No default in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
5. SEBI REGULATIONS:
An issuer shall make a bonus issue of equity shares only if it has made
reservation of equity shares of the same class in favour of the holders
of outstanding compulsorily convertible debt instruments if any, in
proportion to the convertible part thereof.
the lo .
shall make a reservation of bonus Sh .
to be issued to
such deb holders

-
on conversion so that they don't lose because
decrease in
of price of eq shares post bonus issue .
No
entry shall be passed for this of now Only as .
ensure
that auth eqsh d Res are sufficient to issue such

Cap . .
additional sh in
future { Refer 04 }
. .

BONUS & RIGHT ISSUE
6. JOURNAL FOR ISSUE OF BONUS SHARES:
a) If existing shares are partly called and paid:
f-
q Sh .
final call
Afc the
To Eqsh Cap Ali
the
Bank Afc
to Ewsh final call Me
b) Amount set aside from reserves for Bonus issue:
onAM Alcor
CRR
CR Afc -
on
SP Ali W
GR Alim
PIL Afc the
to Bonus to shareholders All

c) Issue of Bonus shares:
,n§¥ Bonus to shovels Afc rn

.
to ftp.sh Cap Afc
Note: Increasing the authorised share capital: If the post bonus issued
Eq sh Cap exceeds the Authorised Eqsh Cap , the

co must
. pan . -
necessary
resolutions to increase such Author cap before issue .
bonus shares
of
.
increase !
min .
-
mm
Post Bonus Issued Eqsh Cap < ✗ XX
Auth
l¥
⇐ Pre n .
F- Wsh cap =

BONUS & RIGHT ISSUE
7. BONUS CALL:
The company can make its partly paid shares fully paid without calling for
payment in cash, by using its reserves.
Sources of Bonus call:
in Cmh)
a) Cap .
Reserve ( realised
b) hen -
Reserve
c) Pll All
Note : CRR d see -
prem
. cannot be used because on
per
Act they
used bonus shares
can be
only for issue
of fully paid .
Journal entries:
a) Amount set aside from reserves:
✗✗
CR Afc the
✗✗
UR Alc -
Dr
✗✗
PIL Afc the
To Bonus Call Ali ✗✗
b) Final call made:

f- qsh Final Call
.
Alibi ✗ ✗
✗✗
To t.q.sn Cap Alc
c) Adjustment of Final call made:

M
Bonus call Ali -
✗ ✗
to F- Wsh final call Ali ✗✗

BONUS & RIGHT ISSUE
8. RIGHT ISSUE:
A right issue is an offer of equity shares in a further issue of shares by a
company to its existing shareholders, to enable them in maintaining their
financial and governance interest in the company, if they so desire.
The existing shareholders are given a right to subscribe these shares, if

they like. However, if they do not desire to subscribe these shares, they
are even given the right to renounce it in favour of someone else.
Right of renunciation refers to the right of the shareholder to surrender

his right to buy the securities and transfer such right to any other person.
The renunciation of the right is valuable and can be monetised by the
existing shareholders in well-functioning capital market. The monetised value
available to the existing shareholders due to right issue is known as ‘value
of right’.
Computation of Value of right:

Value Cum Theon tical F-n right
of Right right is
'
price
:
Price
t f
(Question ) ( calculate)
[ of Sh before
The or En No
right price right ④
Lum
Rithnt!
-
Right yes
=
-
-
µ right
µ,
price
✗
price
]
weighted Aug price total No -
of Sh .
of Normal shd
Right Sh .
Accounting for right issue:

The accounting treatment of rights share is the same as that of issue of
ordinary shares.


REDEMPTION OF PREFERENCE SHARES
1. REDEMPTION OF PREFERENCE SHARES:
✓
Redemption is the process of repaying an obligation, at prearranged
amounts and timings. It is a contract giving the right to redeem preference
shares within or at the end of a given time period at an agreed price.
These shares are issued on the terms that shareholders will at a future
date be repaid the amount which they invested in the company.
maturity they
.
will
give
on the
shares to lo
, .
for redemption
company Pref .
Shonen .
>
Payment of Redemption price

d
agreed at time
of issue

3. PROVISION FOR REDEMPTION OF PREF SHARES:
a) Maximum
✓ maturity period - 20 years [for infra cos .
%¥m÷
b) Sources:
✓ [ Paisa Kaha se
aega]
in free
lil Out
of ka
existing assets to the
extent of bat .
reserves
[Dadaji pvnji )
Iii ) Out
of issue of new shares [ Both Eq .
or Pref ] .
tail out of Both flit d Iii ) )
c) Preference shares to be redeemed -

- must be fully paid up. If share are
partly paid, Final call must be made and received before redemption.
-
-
d) Writing off POROPS: Prem ]

Redemption of Pref
.
on .
Shonen loss
As
per section
55
,
the loss
of POR 0ps can
( Shatt)
be written off against
Securities premium or free reserves .
e) Creation of CRR:
redeemed
of
a) RIB if Pref . shares are our n
existing assets .
A)
kifu
To
protect the interest
of creditors
by ensuring them
distribution Cmh will made

that no
further of be to
shareholders out
of existing omets to the extent
of amt paid
shovels
to
pref .
c) Kitna :)
2
amount equal to the
face value of Preference shares
redeemed our
of existing assets
.
d) Kaha se free reserves ( hen Res

.
.
,
PIL )
=

4. JOURNAL ENTRIES:
a) If preference shares are partly paid:
Pref . share final call Ali - Dr ✗✗
To
Pref . share
capital A/c
✗✗
Bank Alc -
Dr XX
to
Pref -
share final call A/c ✗✗
b) Redemption proceeds due:
Pref Sh .
Capital Alcorn ( face valve) ✗✗ too
Po RoPS Ale → Prem -
on redeem ) .
✗✗ 5
to
Pref shareholders Alc ✗✗
1001105µg
To Disc .
on
redemption Ali ✗✗ 2
c) Selling of investments to gather funds:

Bank Dr lab SP )
Alc -
PIL Atc →
11055g
TO Investment Ale Cat cost )
TO PIL Alc C Profit)

d) Issue of new shares:
Bank Alc - Br ( Issue price )
A / efface
to
F-qlpref.sn Cap . values
To Sec Prem Ali ( issue at
poem )
.
.
e) POROPS written off: * a Payment to Pref shares .

: -
See Prem Alc

.
m
- ✗✗
Pref -
shaven .
Alem
✗×
✗✗ ✗
Alarm
✗
free res .
to Bank A/c
To POROPS A/c ✗✗
f) Creation of CRR:
free Mr ✗
res .
Alc ✗
To CRR A/c ✗✗

5. COMPUTATION OF CRR: ①
"
Imp v. v.v .
a) Redemption fully out of Issue of new shares: [01.2.3]

✓
Nil ( as used)
CRR
existing assets are not
=
Fr 5L
No .
of sh to be issued -
.
of Pref shred .
= 50000
FV / new shone To
( capital
capital se replace Karna hail
to
b) Redemption fully out of existing assets without issue of new shares:
✓
[QU ]
full
CRR :
face value
of Pref -
sh .
redeemed
☒ c) Redemption out of both: ☒

Care !: If no
of shares to be issued are
given in the question : -
.
105,1
0
? CRR :
⑧ of Pref .sn redeemed ↳ ④ of new shares issued

-
issued in
Care ? !
If no .
of shares to be are not

-
given the
limited insufficient
got question but reserves are or to
,
08) redeem all pref shares :

-
-
step ! : compute free reserves available

for CRR :
bat FR 20000
Op of
: ✗ ✗
-
Y Amt to be retained +
111×1 0
# Porops to be w/ off
( ✗ ✗) ( 10000
of
in excess SP = -4000 -
• 5A)
* f) PIL of 20000-0%-400
sale MV
✗¥
on "
CRR =) -
-
•
5N)

shares to
Shep ! No
of new be issued to
comply Sec 55 ? -
.
Noofnewsh
=
{ Fr of Pref shred . -4 CRR }
face value / Sh
✓
shares issued
cone ? : if of is be not
given but
No .
to one
,
10101
✗
Cmh insufficient , new shares
bat .
shall be issued
to
gather contr funds for redemption :
-
step! Calculate conn bat . available for redemption : -
Cmh bat
Op xxx
- =
④ sale
of Inv ✗ ✗✗
=
f) lmh to be retained :l✗✗#

Cmh available
New shares to be issued to Conti

Shep ? gather
-
=
{ REIemption proceeds payable -4 conn available
}
Issue Price / sh*
*
step ? CRR :
[ FI of Pref shred .
-4 Fr
of new sh issued ]

Summing
Points Bonus issue Pref
.
-
S.h. Bvybqck
1.
fully paid ✓ ✓ ✓
share
2. Sources •
CRR •
free reserves • free receives
{freedom }
Cap See Prem
Ressfincmh lssveofnewsh
Bonus call • - •
.
•
.
Sec Prem Both Issue

of Pref shares
•
• • .
.
CR freeres Both
• '
.
Prem ✗ see Prem Sec Prem

3.
writing off
• -
• -
.
.
•
Free Reserve • Free reserves
4. Creation CRR ✗ ✓ ✓
of
ftp.facevalveofprefshreodeemed/r--wshboughsy
back
of existing
out armets
✗ free Sec Prem

5.
likrcreahedoutof reserves
•
.
• free reserves
b. Journal III. shares are

partly paid pomentsyfor final ,
call )
amide reserves
setting Due
entry
•
.
•
Bonus swallowed •
Gather funds / issveofnew
Bonus call
shisaeeoflnv )
( }
.
•
Setting aside reserves •
Payment toshoneh .
•
final call •
writing off prem .
Final call paid our Creation

of CRR
•
•
.
NAVIN CLASSES of Bonus

CA AVINASH SANCHETI
BUYBACK OF SHARES IV. !mp]
1. MEANING OF BUYBACK:
Buy-back of shares means purchase of its own shares by a company. When
shares are bought back by a company, they have to be cancelled by the
company. Thus, shares buy-back results in decrease in share capital of the
company.
Advantages of buyback:
(a) to increase earnings per share if there is no dilution in company’s
earnings as the buy-back of shares reduces the outstanding number of
shares.
(b) to increase promoters holding as the shares which are bought back
are cancelled.
(c) to discourage others to make hostile bid to take over the company
as the buy-back will increase the promoters holding.
(d) to support the share price on the stock exchanges when the share
price, in the opinion of company management, is less than its worth,
especially in the depressed market.
(e) to pay surplus cash to shareholders when the company does not
need it for business.
their Shi to co -
ggamfen BB under
y offer of
Equity
J
shared
Company .
Cancellation d > ↳ sale

ojlnv .
ofsh.sn Capa .
Payment of Buyback Price
Bank d

BUYBACK OF SHARES
3. PROVISION OF SECTION 68:
a) Sources of Buyback:
A co .
can buy back its own
equity shares out
of ! -
¥#=×isting omefs ✗ tent balance in Sec Premi and

to
of
.
free reserves
;
shares [ However kind
Iii) Issue
of new , buyback of a
of Sh .
cannot be made out

of issue
of same kind of shares i. e.
Eq shares cannot be BB out of issue of eq shares]

.
both d) d Iii)
Liii) Out
of .
b) The existing shares must be fully paid up. If shares are partly paid,
✓
Final call must be made and received before buyback of those shares.
c) See 69 : Creation CRR :-( same as

Pref shares )
of
- .
if a
company buybacks its
eq . shares out
of existing assets .
then an amount equal face value of

to the eq shares
so
called
bought back shall be
transferred to
new a reserve
from bat Prem and free

" "
CRR . in Sec .
reserves .

Fv : £10 Called up £8 BB price £25
Eg
- = :
. ,
BUYBACK OF SHARES
4. JOURNAL:
a) If existing shares are partly called and paid:
2
F.
qsh .
Final Call A Chr
/
Capital
2
TO
Eq .
Sh .
A/c
Bank Afc
- Dr 2
To f-
qsh final call AK 2
b) Buyback proceeds due:

f- qsh A Cbr 10
.
Cap /
Prem 15
-
on
Buyback A/c -
Dr
F-q.shareh.t /L2sBanun-1c-A
to
c) Issue of new shares:

✗✗
To
Pref Sh Capote ✗ ✗ ( Diff -
1)
TO Sec .
Prem Ali ✗✗
d) Sale of Investment:
or
Bank A/c ✗✗
Closs) ✗ ✗
PIL A/ c-Dr
TO Inv ✗✗
.
A/c
to PIL A/c ✗✗
e) Payment to shareholders:
Eq shareh.tt/c-Dr
.
25
To Bank Aye 25

BUYBACK OF SHARES
f) Writing off POBB: 8) CAR ( Diff
.
-
2)
Sec .
Prem A/c
-
Dr 15 Sec Prem .
A/c or 10
Free res -
A/c -
Dr ✗✗ free res.tt/c-Dr ✗✗
TO POBB A/C 15 TO CRR Afc 10
5) Limits for buyback: ☒☒ Hower

of the three ]
1) Resource test: Max . demount that can be used for buyback : -
251 of [ Paid up share

cap A) free reserve indd Sec Poem] .
. .
- - - -
i Max No
of F- qsh that can be bought back : Maxamt
. .
- -
.
Ee
BI !
Paid up 100
qsh Cap
}
Sh : F-
120h
Pr Sh Cap 20
Rds :
AR so -
90k
SP 30 30 &
PK UO -
Tc④d
amt=2④✗2s7
-
CR
20--11 Max .
60ft
= .
t-qgY_nr2crshqresMax.N@ofeq.sh
r-v.tw BB Price £-3.0 shares
of
:
No .
:
2) Shares outstanding test: ones

that can be bought
back : -
251 of 01s Equity

.
shares
Max Sh = Iocr ✗ 25% : 2.5 cash .

BUYBACK OF SHARES
ADI
3) Debt Equity ratio test:
9baMD¥÷µ¥atio
maximum 2 :| .
→
£400 Cr Post buyback Eq
Debt Min
:{ of Debt
-
=
or
min Post BB Eq Post 2

of Eq
:{ ✗ £400 cr : £200 er Max
buyback Debt : .
Present for .tl#-RspT:I2U0cr

Max Dilution of Eq .
: £240 Cr -
£-20 Ocr = £-40 or

=
.
FV : £10
Dilution
of F.qfsh bought back : £10
d
A) £20 ⑦ £10
d d
BB :
£20
Sh .
Capt POBB CRR

d d
% : :: :
=
£-4,0
ofsh that
bought back
£¥q÷
Max no can be .
1cg
.
.
=
Post Debt F- shall not exceed

buyback g. ratio
2 :L .
This means
post buy back Equity shall nor
fall below
# of Debt)
Particular figures
(a) Present Debt (Borrowings ) xxx
(b) Present Equity lshlap -41 FR .
HSP) ✗✗ ✗
2
µ%Ñost buyback Equity Iof Debt
dilution
(d) Max possible in
Equity -1 b- c) Xxx
.

(e) /
Dilution eq share Sh .
bought back IBB Price ⑦ CRR)
shtap + ÑOBB
.
: Max no .
of EW shares
.
that can be bought back :

1dL
(e)

ISSUE & REDEMPTION OF DEBENTURES VII.
1. MEANING OF DEBENTURES:
a) Debenture is an acknowledgement of a debt in writing, given under the seal of
the company, containing a contract for the repayment of the principal sum at a
specified date and for the payment of interest (usually half yearly) at a fixed rate
until the principal sum is repaid. It may or may not give a charge on the assets of
the company as a security for the loan.
b) A debenture like a share is also a movable property transferable in the manner

provided in the Articles of the company.
c) The long-term requirements of capital are raised by any company primarily

through issue of shares and debentures. While the shareholders are essentially
the owners of the enterprise, those who buy debentures are creditors for long-
term funds and do not enjoy voting rights.
2. SHARES VS. DEBENTURES:

ISSUE & REDEMPTION OF DEBENTURES
3. LIFE CYCLE OF DEBENTURES:
stages stage 2 Stage }
Issue
of Debentures interest at
periodic Redemption
& intervals d
for cash on non-cash d

Repayment of
consideration on
per initial principal
agreement
.
4. ACCOUNTING FOR ISSUE OF DEBENTURES:
Issue for Cash Issue for consideration Issue as collateral

Other than Cash security

a) Issue for Cash Consideration:
i) Transaction structure:
" " EP
""
Paid in an
,
K
Company Debhr Investor

.
/
>
Issues Debentures
ii) Basic technique:
the
aping for issue
of Deb . is same as
Alling for issue
of shares
except
the
foil . two
differences : -
(a) Debentures can be issued at discount ; ( loss)

(b) If Debentures will be redeemed at
premium ,
the loss d
liab .
shall be
iii) Journal entries:
provided for at the time
of issue .
③ at Par at Premium at Discount
#
Redemption/Issue
& Bank -0298
Bank Ap Dr
-
100 Bank Afcon 105 Afc
①
at Par To Debenture Af To Deb All .100 Disc on Issue AYAZ
-
100 TO see Prem Afc 5 To Def All 100
Bank A 100 Bank Afc 102 Bank Alcon 98

Afc Dr
100405s
- -
TO Def Alc 100 To Deb Ale on Issue Dr- 2
at Premium To see Prem AKZ To Deb Afc 100
Loss on Issue Atms loss onlssvettrs Loss on ISHA 5
To PORODAK 5 To POROD
POROD.tt/c5BAnkA/c-DrlO0Bank-Dr Afc 5 TO
102 Bankim 98
TO Deb 100 To Deb 100 loss on Issue m2-
at Discount to see Prem 2 TO Deb 100
Ignore
.
kijie

b) Issue for non Cash Consideration:
<
Asset purchased
company payment for any

> Vendor
/ Supplier
made
by issue of Deb .
ii) Journal entries:

No .
of Deb . to be issued =
Amt payable to vendor through Deb .
Issue price / Deb

Asset Afc → ✗✗
to vendor All ✗✗
vendor Alc -
Dr ✗✗
Disc -
on issue of Del Ali -

Dr ✗✗
To Debentures Ak ✗✗
TO Sec .
Prem Ak ✗✗
☒ Ac) Issue as Collateral security:

loan taken from 6am
L
company > Bank

Assets d Deb kept -
an
security
ii) Points to remember:
consideration
a) It is nor a real issue for .
b) No int . is
payable on such debentures
e) if co debentures given back
the
repays loan the are
-
,
to the co .
d) If loan is not repaid ,

the bank
enforces security of
have to pay
deb d the co will now inherent on
NAVIN CLASSES debentures d redeemCA AVINASH SANCHETI

. -
them on maturity .
iii) Journal entries:
Alternative I = No
entry to be
paned for such issue .
Only
a disclosure ¥ made in Nones to Aks .
Alternative 2 =) Asset side

.
Debenture
suspense Afc Dr other
-
NCA
To Debentures All time side long
-
term
in face
value
of Deb .
] Born
5. WRITING OFF LOIOD:

i) Concept:
[ 101013 = Disc .
on issue ④ POROD A) Issue F-
xp .
]
writing off loss
a d
Treated on
capital Treated Def Rev
%§¥
on .
-
loss d written A-
xp .
d written
off
Sec Prem PILAK over the
off against
. .
to
fully at once
life of Deb
-
.
d d
See -52 As -16
&
debentures
In ratio
of op
every year over the useful
ii) Journal entries: t life
PIL Ali - Dr ✗✗
TO 1010 D Afc ✗✗

6. INTEREST ON DEBENTURES: v.
Imp .
i) General points:
(a) Im on Deb .
is
paid at a
firedrake at periodicals .
(b) The date of payment a periodic interval is decided at
the time
of issue .
[ Annually Half yearly Quarterly ]

, ,
4) Int is
always calculated on
face value .
(d) Inherent amt : face value A) Rate ④ Periodic interval
(e) The Int on Deb is an

expense for the co .
ii) Journal entries:

µ on Interest date (IPD) :
every payment
-
Inherent Ali -
Dr ✗ ✗
to Bank Ale ✗✗
TO TDs ✗✗
payable All
TDs
payable Ale the ✗✗
To Bank Ale ✗✗
127 At Yeon end ,

Int exp
.
will be
trfd to Pll : -
PIL Ali N ✗✗
To Inherent A/c ✗✗

iii) Interest accrued but not due: *☒ ☒ ☒
2020-21
6m \
gfÑ
3m
1.4.2020 30.6.2020 31^12.2020 31%21-376 .
lntforrbm lntforbm
Issue 101×8%43 101×8%116
=
Th " d
No : 10000 Int accrued
Fvr EIOO . but not due
Int : ftp.a ( 3m)

lntdahes
=
101×8%11,3-2
ice
30.6 d 31-12
ÉIÉymm**I
am
6m 3m
I
zf.z.am
'
1.4.21 30.6 31.12
lntforom lntforbm
d
101×81×4
✓
,
lntaciubvr
lntaccbutnordve
tolnt not due
13m )
will arise Inherent dates dyem

this
concept only if payment
end are not same .
Journal
ye Interest AKM ✗ ✗
iolnt accrued but not due Alc
.
✗✗
Next yr Int accrued bvtnotdve AKXX

beginning .
XX
To Interest Ali
7. REDEMPTION OF DEBENTURES:
Redemption of debentures is the process of discharging the liability on account
of debentures in accordance with the terms of redemption stated in the
debenture trust deed.
Discharge of debenture liability is usually by paying cash to the debenture

holders. But this can take other forms such as conversion or rollover.
Deb to C "
g.
surrender on
Mahn;y
✓ Company Deb hrs

>
Payment of redemption
Deb liab d
.
proceeds
/ F- qshcap
[ by converting ]
Bank d A in conn or
deb .
into F-q.sn
ii) Basic Journal entries:

a) Redemption proceeds due:
Deb Nr ( face value )
.
Afc
POROD A/c Mr 1 Premium on redemption)
To Deb hrs Alc
b) Payment to Debentureholders:
Deb hrs A
/c -
M
to Bank All
To
Eqsh Cap All
to see .
Prem All
c) POROD written off:
See Prem / free
}
the
res Ali ( floss not provided
-
.
to POROD A/c earlier )

Note: Computation of number of shares to be issued on conversion:
Shonen Consideration payable in shares

No
of
. =
Issue price / Sh .
"
post iii) Concept of DRR & DRF: [ sect ,] free
(
reserves
A company issuing debentures may be required to create a debenture
redemption reserve account out of the profits available for distribution
of dividend and amounts credited to such account cannot be utilised by
the company except for redemption of debentures.
Such an arrangement would ensure that the company will have sufficient
liquid funds for the redemption of debentures at the time they fall due
for payment.
Provisions of section 71:

(1) if a co .
issues deb .
which are redeemable in Cmh
,
the co .
may have to create d maintain a Deb . Red . Reserve

IDRR)
d Deb . Red . Investment ( DRI) -
.
127 Such DRR d DRI are not req .

for convertible Det .
aside earned
(3) DRR means
setting profits so that all
profits
one nor distributed as dividends .
(4) DRI means

setting aside Cmh so that the same can
be used to deb hrs

repay .

Adequacy of DRR:
DRI -
X
DRI . ✓
DRI - ✓
DRI - ✗
[unlisted cos other than NBFCSD

before redemption starts .
Hfcs] DRI -
✓

Adequacy of DRF:
Further, as per Rule 18 (7) of the Companies (Share Capital and Deb.)
Amendment Rules, 2019, following companies:
a) All listed companies including NBFCs & HFCs (other than Banks & AIFIs)
b) All unlisted companies other than NBFCs & HFCs.
shall on or before the 30th day of April in each year, in respect of
debentures issued, deposit or invest, as the case may be, a sum which
should not be less than 15% of the amount of its debentures maturing
during the year ending on the 31st day of March of next year.
Journal entries:
a) Amount set aside to DRR:
PIL Atc -
Dr
TO DRR All
b) Investment of funds:
Deb . Red .
Investment Alem
To Bank Afc
c) Interest on investments received:

Bank the
Afc
TO Int on DR Inv .
AK
d
t tr
Aff f DRR is cumulative if DRR is non -

cumulative
d d
Int will added to DRR Int will be trfd to PIL
.
d d
Int on DR Inu Alc - M Int on DR Inu Afc the
to DRR All To PIL Afc

d) In the year of Redemption, Company will sell investments to gather
funds:
Bank Afc Mr
f
DRR All / Pll A# Noncumulative
)
To D R Inv Alc
cumulative
-
-
nRR /
PIL Ak
Shep't : -
Check whether DRRDDRI
are adequate
step 2 : -
Int on Inv . d sale of Inv
e) Redemption proceeds due:
Shep 3 : Redemption of Deb
Deb .
A
/ c - R
Steph :
-
DRR trfd to GR
POROD Ale Mr
To Deb hrs Afc
f) Payment to debenture holders:
Deb hrs Alc W -
To Bank All
g) Writing off POROD:

Sec . Prem / free res .
Alem
To PO ROD AK
h) DRR balance transferred to General reserve:

DRR Afc Mr
To General Reserve Ali

iv) Concept of Own Debentures:
a) Purchase of it’s own Debentures by the company.
b) Reasons:
• if Deb. are trading cheap and company has surplus cash, it can
purchase and redeem its debentures.
• Saves interest
• Can be purchased as investments.
c) Options on purchase of own debentures:
Purchase for Purchase for Purchase for

immediate cancellation future cancellation resale
d d tr
6. has
G. has purchased its purchased it G. has purchased
Deb .
for immediate Deb .

d will cancel its deb .
d will
thou Deb
redemption .
.
in
future resale them if it
in
requires funds
future .
d) Cost of Own Debentures:

On purchase of its Debentures, the company will have to make payment
for the price of debentures and interest from last IPD till date of
✓
purchase.
¥0
Price quotations
Ex Interest price Cum Interest price

d d
Price
for Debentures
only Price for Deb .
including
Interest

• Cost of own Debentures = En - int price 1£99 )
• Total payment to be made = (um -

int
price 12=1011
• Treatment of Interest paid = to PIL (2--2)

Charged on an
exp .
e) Accounting for own debentures:

• Purchase for immediate cancellation:
-
a) Purchase of own Deb :

°
Own Deb A / c- Dr ten int Price )
)
Int on own Deb Ale Dr Ant )
-
Combined entry : -
To Bank Afc Humint Price ) Detach (face value)

Int on Deb Alcon
b) Cancellation loss on canc -
on
To Bank (com
.
,m,
,, µ , , ,,, .am,
To Profit on
cand
loss on canc Alem IMM )
.
.
To Own Def All CER int) - -
to
profit on canc .
n-klm.ly
-
c) Profit / loss on canc .

: -
Profit on canc .
Alcon ✗✗
To
cap Res . .
A/c XX
Cap Res
. .
/ free Res Alc Mr ✗✗
TO loss on canc
.
A/c ✗ ✗
Int in
future will be calculated on balance deb .

• Purchase for future cancellation/resale:
#
2m 6M IPD IPD
④
µ p
s µ
,
1.4.2021 1.6.21 30.9 31 -3.2022
d d
lntdqhe Soldat
OISDE.to Purchase d Deb

-
É98(EM
Nos :/ 0000 Price
Nos -1000
.
total accrue : soooo
deb
FV -100
-
pn.ee:99/lvm) ↳
as
Int :9Y . Int :
£-1500 oooo nooo Bank A/c -
Dr 98000
d Public co
To own Deb 9700
.
y µ
treated on
payment savings to PIL 500
An Inv Tointon Own

f
.
2250
Deb .
&
.t /cth97@lntonDebAkm4soo0lnron0wnDebAfM15W
Own Deb
To Bank
Tointon 0134500
All 40500
To Bank All 99000
cancel
Deb AKM / IOWXIW ) 1. Now
To Own Deb 975W
To POC 2500

Purchase
1. On
of own Deb : -
Own Deb A ( F- n int Price )

/ c w
Int on Own Deb A/c the
to Bank Ale Clum int price)
☒
2. On
every IPD :-( before cancellation)
int will accrue on all deb . and the same will be divided
=
into two
parts :
-
Int outsider
payable to
Int saved on own Deb .
Int Deb A c-R

on
/
TO Bank Ali
To Int on own Deb AK
3- On cancellation :
Deb . A/c -
M ( face value)
loss on cane .AT#pRes .
/ free res ) .
TO Own Deb Ale ( cost )

to Profit on canc .
Ale Cap .
Res .
)
~
resale Deb :-(Interest lena mat bhulna)
4. On
of
Bank Ale m Humint price)
DIL Ali Mr Hoss )
TO Own Deb All / lost)
to Int on Own Deb All •
TO
PIL AH 1 Profit)

FINANCIAL STATEMENTS OF COMPANY
-
1. SECTION 129:
a) As per section 129 of Companies Act 2013, every company shall prepare and
lay before its shareholders in AGM its financial statements for every financial
year ending 31st March.
b) Financial statements should give a true and fair view of the state of affairs of
the company or companies and comply with the accounting standards notified under
section 133 and should be in the form or forms as provided in Schedule III under
the Act.
2. COMPONENTS OF FINANCIAL STATEMENTS:

.
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-
alia include: statement
of Profit
d loss
/
(i) a Balance sheet as at the end of the financial year;
(ii) a Profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial
year;
(iii) Cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and
(v) Notes to Accounts.
Provided that the financial statement, with respect to One Person Company,
small company, Private start up company and dormant company, may not
include the cash flow statement.
3. FORMAT FOR FINANCIAL STATEMENTS:
Balance sheet Cashflow statement Notes to accounts

[Schedule III] [AS-3] [Schedule III, AS, Laws]
Statement of profit and loss Statement of changes in equity

[Schedule III] [Schedule III]

4. SCHEDULE III:
a) Applicability:
-
i) All companies shall prepare their financial statements as
per the format provided under schedule III of the act.
ii) However, companies governed by special statutes like

banking and insurance companies shall comply with the format
of financial statements given under their respective acts and
they need not follow schedule III.
b) Content:
Division I Division II Division III
For companies For companies For NBFC

following AS following Ind AS following Ind AS
Part I Part II
Format of Balance Sheet Format of SPL

c) Features:
i Vertical format of Balance sheet d SPL -
27 Along with current

year figures comparatives i.e.
corresponding
,
figures of reporting period given previous shall also be .
37 The
figures in its shall be rounded
off
as
follows : -
① If total Income a- 100 crores =) hound off to hundreds thousands , ,
lakhs ,
millions or
part thereof .
(a) n
7100 sound millions
off
n n
crores to lakhs , ,
crores or
part thereof
.
used
[
However ,
the same unit
of rounding off shall be
]
throughout the FS -
4) Sch it.
provides min .
requirement of disclosure on
face
of SPL d Bls .
If Disclosure requirements in sch IT

for Notes to Afn one
" ''the
minimum disclosure sew . i. e. entities will have to
loins
prov of
. sch # along with requirements of Asd .
Cos Act d override

6) AS will schedule II.
Cos Act
:
b
sch II .

5. FORMAT OF BALANCE SHEET:
ppr=
y
ppr:)
-- -

Disclosure requirements:
d d
dliab Assets
Equity .
d d d d
shareholders
Shmeappli . Noncurrent Wernert
fund Liat
money pending bias .
ILDOL ) 1ST OS )
Allt .
d d d
Noncurrent Current
Sh .
Cap
Assets Assets .
Rds
Sh -
warrants ( PIDLO ) ( CITCSO )
d commitments
contingent liab
* . :
-
(a)
Contingent bias . are
possible obligations ( chances of occurrence
ten than 50%7 whose outcome depends on
happening or
non -
happening of one or more uncertain

future events .
There
obligations are not
recognised they ,
are
only disclosed
in Notes to Alcs .
demands
Pending Disputed
acknowledged
Claim not
Eg .
court cones , .
debt Bills discounted not matured Guarantees

yet on
, ,
given on
behalf of others .
(b) Commitments refers to amount payable under contracts which
not yet executed by the other There not recos

are
party .
are .
an liab .
on there is no
present obligation .
They are
only disclosed
in Notes to Alu .

E.g. a) Contracts for capital projects / fixed Assets) which are
yet to
be
performed .
due called Investments held

b) Amount on
partly .
* Disclosures: -
H Shane Capital
:
.
Items Paid up F- q Sh .
Capital
n n
Pr .
Sh .
Capital
④ Info . to be disclosed : -
Called up
Authorised .
Issued .
subscribed .
capital
calls in arrear
⑦ Share
forfeiture balance
☒ Any bonus issue , buyback shares issued for consideration
,
other than contr

No .
of shares d face value

Reconciliation shares at the beginning d end of the period
(6) of .
(2) Reserves d Surplus : -
(a) Items : -
Reserves =) GR SP CRR CR DRR ,

, , , ,
Revln - serene
surplus a) P / 2 All bal.ie

(6) Info to be disclosed :
}
Reserves bat
op
. = ✗✗
+11 Addition = ✗✗
30000
a utilised -

* *
Surplus =) PIL balance
op #
-
✗✗ 10000
1¥ ④ current year's
e)
Appropriations
profit : xx SPI 150000 )
Dividends • (✗ ×)
:(xx)
✗
Transfer to reserves
a. bae . EW
Too
*
if PIL Alclsvrplrs) has a -
ve bat -
l loss ) then -
head(l0
,
it shall be under the

also
presented
Rds .
of of Pll , the total of Rds becomes re

but then
*
if because ve -
-
will be shown under the head Shonen

also the Rds funds .
✗
→ '
4mon#
311=3
¥:Ee
6. CURRENT & NON CURRENT ASSETS:
An asset shall be classified as current when it satisfies any of the
following criteria:
(a) it is expected to be realized in, or is intended for sale or consumption
✓
in, the company’s normal operating cycle; RM.WIP.ph , trade receivables .
(b) it is held primarily for the purpose of being traded; fh in trade
I
,
stock -
(c) it is expected to be realized within twelve months after the reporting

date; or 10am ,
Advances , Investments
(d) it is cash or cash equivalent unless it is restricted from being
:
exchanged or used to settle a liability for at least twelve months after
the reporting date.
All other assets shall be classified as non-current.
7. CURRENT & NON CURRENT LIABILITIES:

A liability shall be classified as current when it satisfies any of the
following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
YO
(c) it is due to be settled within twelve months after the reporting date;
(d) the company does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting date. Terms
of a liability that could, at the option of the counterparty, result in its
settlement by the issue of equity instruments do not affect its
classification.
All other liabilities shall be classified as non-current.

LRM)
Note: An operating cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. Where the
normal operating cycle cannot be identified, it is assumed to have a
duration of 12 months.
operating cycle :
I ::÷÷:÷:::÷
Raw Mat .
holding period = ✗ ✗✗
Fa ✗✗ ✗
holding period a

8. FORMAT OF SPL:

Disclosure requirements:
"µ
'" tax
#
'
format Taxes asi

of SPL :
✗pÑ
①
-
mi.
d d d
a) Income! -
c) Profit / loss : -
d d d
1. Revenue
from operations 1 .
Cost of matlomvmed Profit before tax :*
2. Other Income 2 . Purchases of stock in trade e) Current yr
Inc tax :(xx)
op.st-d.sk/r3.Chanfhinlnv-ofw-1Pdf-hpngiiafheriaFE
.
mpl Benefit Xp 4. f. . f-
Profit)
.
liver
5- finance lost
6.
Depreciation d Amort exp -
.
7. Other
Expenses
D8 .
G-
To St ✗✗
op
.
25000
£0000 my a. St ✗✗ 10000
1700007
- 70000
¥0
None ".
4) Taxes:
a) Income tax →
After PMT
b) Municipal taxes Other F- xp .
c) Ust =) Deducted
from bates .
(2) small
exp
.
can be clubbed
"
together as misc .
exp
under
the head mother

Exp . . However , the
foil .
exp shall not be
clubbed ! -
a) Audit fees
b) F- xp whose separate disc is imp . .
.

¥14 ftp. whose Amt .
exceeds ii. of turnover or f- 1. war ; higher .

CASHFLOW STATEMENT
1. CASHFLOW STATEMENT:
1) Mandatory
✓ part of Financial statements of a company;
2) Governed by the principles of AS-3;
✓
3) It is a summarised and organised cash book;
÷4) It shows movement of cash and cash equivalents during the reporting period;
5) Movement refers to inflow and outflow of cash and cash equivalent;
6) Non cash transactions like depreciation, provision, issue of shares or debentures
* for consideration other than cash etc. are not shown in Cashflow statement;
7) Final result of Cashflow statement is “Net cash generated

during the period” so
*any inter-se movement among items of cash and cash equivalents is not shown is
Cashflow statement.
f-
g. Conn deposited into Bank
,
Cmh withdrawn from Bank ,
Purchased sale of marketable sec .

.
☒ 2. CASH & CASH EQUIVALENTS:

a) Cash in hand;
lmk { b) Balances with banks; ( Demand Deposits >

c) Cheques or drafts in hand;
Cmheqvi d) Marketable securities -
. There are
very
short term .
highly
liquid investments which are
readily real is able inn known
and have
insignificant risk
of change
in
amount
ofThis
contr
value . includes investments having Max .
mat .
of 3 months .
F.
g. very short term fixed
Deposits Inv in very short term
,
.
treasury bills ,
Inv in
.
Prefsh / Deb of co just before their maturity
. . .
.
* Note: Status of Bank overdraft:
a d
OD taken aborr
Temporary OD on .
b facility
a
Part of cdcr:( ve item) treated as a borrowing .

CASHFLOW STATEMENT
3. SEGREGATION OF CASHFLOWS:
¥ Three activities
OTTO
Cashflow from
Operating activities
w
Cashflow from
✓
Investing activities
a
Cashflow from
✓
Financing activities
d
includes includes conhflows It includes Anhflows
It
anhflows It
related to : .
related to : related to : -
4) Day today operations f) Purchase dsaleofr-n.li)

issued Redemption
business excl
of dfinrihlrm
.
Inv .
Iii n
d a nlnv .
ofshmeiloeb .
liiiloamgivendtheilii) taking d repaying

residual cmhflows borrowings
(2) Any repayment .
which cannot be liylnt.mu Rentals on

Issue related
.
Liii)
loans dlnv
clarified under Inv exp
. .
.
ftp.selahedtopvrchonelivllntdpivf-g.Hompensation
or fin .
act .
from offallnv onshmesl d sales .

paid
lawsuit .
/ d Deb loans .
b) income tax exp .
Exp for operation dmaint

. .
vnlenitcanbe classified items

of fits one operating
.
Under other heads .

CASHFLOW STATEMENT
4. SOME SPECIAL ITEMS:
a) Income tax:
Hlf segregation is
possible classify income tax in the same
head on that of the related Income .
not =) Operating activities

n n n
(2)
b) Extraordinary items:
Always disclose
separately under the respective heads .
f.
I g.
1m .
claim seed on loss
of Assets
.
Compensation from law
suits
, lottery incomes etc .
$ c) Loans & Advances and interest received:
111 Financial Enterprises ( Banks NB Fcs) , Non

=
-
financing
0A
Deposits accepted d Int paid on them =) FA
10am given dint earned on them =) 0A 1A
Inv made d Int =) 0A

n n
.
n
1A
Int earned =)
**
Inv . in subsidiaries d 1A 1A
Borrowing taken d Int paid FA FA
Dividend shards FA FA
paid to
given to employees
loan d Inbreed =) OA OA
d Int seed 0A
suppliers
n n r
-
☒ d) Loans taken and interest paid:

CASHFLOW STATEMENT
5. PRESENTATION OF CASHFLOW STATEMENT:
⑦
Particulars Amount
A. Cash
flows from operating activities : -
✗ ✗ ✗✗
✗✗ ✗✗
✗✗
B. Cmh flows from Investing activities : -
✗ ✗ ✗✗
✗✗
c. Conn flows
from financing activities :
✗✗
Net Cmh
generated during the period (At Btc) ✗✗
④
of
,¥-
bat control Cmh
Op equ
. .
.
a. bat .
of Cmh d Cmhequ .

CASHFLOW STATEMENT
6. COMPUTATION OF CASHFLOW FROM OPERATING ACTIVITIES:
v.it#mP
'
Direct method Indirect method
Under this method , CFFOA is under this method effort ,

is
calculated by adding d deducting calculated by converting net

all
conhflow items
of operating profit earned during the year
activities into conhflows .
a d
CFFOA CFFQA
=
Cash sales ✗✗ NP before taxd F- OI = ✗✗ - 3390

collection
from Debtor ✗✗
✗✗
?¥ n-dj.fo.nl .
① Non conn items in PBT 450

Other
operating rev .
: ✗✗
Cmh (xx) ✗✗ I "zFo

porch (2) Non
operating
. n n n -
-200
Payment to Crediton ( xx) (3) Operating working capchanges : -
F-
xp paid (operating ) ( xx) cop -
d.)
51500
.
)
cmhfromoperatxx
{
CA M = ( ✗✗
1050
Accrual CA & = ✗✗
f) Inc toy
.
paid to conk n
11740)
ch = ✗✗
( FFOA XI cld =
Cmh from operation ✗✗ -

2550
f) Inc .
tax paid
CFFOA ✗✗
before £01
f- OI
CFFOA XI

CASHFLOW STATEMENT
Rd!
surplus
O' ✗
pibalafpli
:::::÷l
= ✗
¢
A) C- YPAT
'
- it
✗✗
f) Appropr
.
.
Dividend HH

CASHFLOW STATEMENT
7. COMPUTATION OF PROFIT BEFORE TAX:
If Cashflow statement is to be prepared from comparative Balance sheets
without information about profit before tax, then PBT can be calculated as
follows:
⑦
Particulars Amount
a. bat
of PILIU.BY) ✗ ✗
top
.
bat
of Pll top .BA) XD
Net
pwfirafmappo.cl tax ✗✗
* Appropriations
Div .
declared ✗✗
Trf to reserves ✗✗
Net
Profit after tax ✗✗
C. Y ✗✗
tax expense
Net
profit before tax ✗✗
(Reversed -11-7 F- OI in PMT ✗✗
Net profit before ta✗dr=0I

④
8. TREATMENT OF PBDD & DEBTORS:
d &
PBDDD Debtors considered

Tremain E¥ Debtors
Net
separately considered directly

to to
✗ IPBDD
being anon -
cents item will In we change directly
,
be
adjusted to Pmt consider change in
PBDD PIL CTPBDD ( OPPBDD Bad Debt) Net Debtors
changed to
-
-
:
consider in
lignum PMDDD Bad
Debts )
(2) in we
change ,
change
Gross Debtors
after deducting Bad debts .


BANKING COMPANY
1. BANKING & BANKING COMPANY:
Banking: Under Section 5(b) of the said Act “Banking” means,
a) Accepting deposits of money from public for the purpose of lending or
investing;
b) These deposits are repayable on demand or otherwise, and can be
withdrawn by cheque, draft or otherwise.
Banking Company: Any bank which transacts this business as stated in

section 5 (b) of the act in India is called a banking company.
Banking Business:

BANKING COMPANY
2. SLIP BASED SYSTEM OF ACCOUNTING:
The bank has to ensure that customers (depositors) ledger accounts are
up-to-date so that when a cheque is presented to the bank for payment,
the bank can immediately decide whether to honour or dishonour the
cheque. It is therefore necessary that transactions in the bank are
immediately recorded or are updated online.
For this purpose slip system of ledger posting is adopted. Under this
system entries are made in the (personal) accounts of customers in the
ledger directly from various slips rather than from subsidiary books or
journals and then a Day Book is written up. Subsequently, entries in the
accounts of the customers are tallied with the Day Book. In this way the
posting in the ledger accounts and writing of the day-book can be carried
out simultaneously without any loss of time. A slip is also called voucher.
In general, the types of slips used in bank book-keeping are: pay-in-slips,

withdrawal slips and dockets.
Need of slip based system
I
Updated Accurate Division of Work Smooth Flow
Accounts of Work

BANKING COMPANY
3. BALANCE SHEET FORMAT:

BANKING COMPANY
4. FORMAT OF PROFIT & LOSS A/c:

BANKING COMPANY
5. SOME IMPORTANT ADJUSTMENTS:
a) Classification of Advances:
Performing Non-Performing
Advances Advances
These Advances generate An advance becomes
O ¥7
timely income for bank non-performing when
and does not carry more the bank does not
than normal risk for receive income from it
non-payment for a certain period
.
Sub standard Doubtful Loss
Asset Asset Asset
Timeline & Rate of provision:

BANKING COMPANY

BANKING COMPANY
ECGC & DICGC Guaranteed Advances:
In the case of advances guaranteed by Export Credit Guarantee
Corporation (ECGC) or Deposit Insurance Credit Guarantee Corporation
(DICGC), provision is required to be made only for the balance amount
of advance outstanding in excess of the amount guaranteed by the
corporations.
In case the bank also holds a security in respect of an advance

guaranteed by ECGC/DICGC, the realisable value of the security should
be deducted from the outstanding balance before the ECGC/DICGC
guarantee is off-set.

BANKING COMPANY
Financial statements presentation:
b) Recognition of Interest Income:
LEO
Performing
Advances
Non-Performing
Advances

BANKING COMPANY
c) Rebate on bills discounted:
A bank may straight away purchase a Bill (Discounting). In this case
after reducing discount charges, the balance amount is credited to the
account of the customer.
Banks discount hundreds of bills every day and when someone gets a
bill discounted, the bank credits the discount account with the full
amount of the discount, the bank will earn in respect of that bill.
<
But in practice, it frequently happens that some of these bills will not
mature by the close of the accounting year. The portion of the discount
which relates to the period falling after the close of the accounting
period is called 'rebate on bills discounted', or 'unearned discount'.
Computation of rebate on bills discounted:

BANKING COMPANY
Journal entries:
a) Opening rebate:
b) Closing rebate:
c) Net Income transferred to P/l:
Financial Statements presentation:

BANKING COMPANY
d) Acceptances & Endorsements:
A bank has more acceptable credit as compared to that of its customer,
because of this, more often, the bank is called to accept or endorse a bill
on behalf of its customers. The bank has to honour this acceptance on
behalf of its client only in the event of a client failing to honour the bill
on the due date.
As against this liability, the bank has a corresponding claim against the
customer on whose behalf it has undertaken to be a party to the bill,
either as an acceptor or as an endorser.
Such Acceptance (Liabilities) which are outstanding at the close of the

year and the corresponding asset (security) is disclosed as Contingent
liability.
Two Accounts have to be opened. They are mirror images of each other.
They are:
(i) Acceptances, Endorsements & Other obligations A/c;
(ii) Constituent’s liability for acceptances A/c.

BANKING COMPANY
e) Transfer to Reserve fund:
Every banking company incorporated in India is required to create a
Reserve Fund and to transfer at least 20% of its profit to the reserve
fund. The profit of the year as per the profit and loss account prepared
under Section 29 is to be taken as base for the purpose of such transfer
and transfer to reserve fund should be made before declaration of any
dividend.
f) CRR:
For smoothly meeting cash payment requirement, banks have to maintain
certain minimum ready cash balances at all times. This is called as Cash
Reserve Ratio(CRR).
Cash reserve can be maintained by way of either a cash reserve with

itself or as balance in a current account with the Reserve Bank of India
or by way of net balance in current accounts or in one or more of the
aforesaid ways.
Applicable Rate of CRR -

-
g) SLR:
Banking companies have to maintain sufficient liquid assets in the normal
course of business called as Statutory Liquidity Ratio (SLR). This safeguards
the interest of depositors and prevents banks from over-extending their
resources.
Every banking company has to maintain the SLR in the form of: cash, gold
and unencumbered approved securities.
This is in addition to the Cash Reserve Ratio balance which a scheduled
bank is required to maintain.
Applicable Rate of SLR -
-



INSURANCE COMPANY
1. CONTRACT OF INSURANCE:
a) A policy is a contract entered into between the insurance companies called the
‘insurer’ and the person insuring his risk called the ‘insured’.
b) Under the contract, Insurer agrees to indemnify the Insured against any risk
that the latter may suffer due to occurrence of uncertain events.
c) Policy specifies all the conditions subject to which the policy is issued.
These conditions bind both the parties.
d) The policy is in the form of a document which the insurance company
issues after receiving the premium.
2. TYPES OF INSURANCE BUSINESS:
Life insurance General Insurance
Fire Marine Others

Insurance Insurance
3. IMPORTANT PRINCIPLES: v. Imp for short notes .
a) Principle of Indemnity - Insurance is a contract of indemnity. The

insurer is called indemnifier and the insured is the indemnified.
In a contract of indemnity, only those who suffer loss are compensated to
the extent of actual loss suffered by them. One cannot make profit by
insuring his risks.

INSURANCE COMPANY
b) Insurable Interest - All and sundry cannot enter into contracts of
insurance.
For example, A cannot insure the life of B who is a total stranger. But if B,
happens to be his wife or his debtor or business manager, A has insurable
interest and therefore he can insure the life of B.
For every type of policy insurable interest is insisted upon. In the
absence of such interest the contract will amount to a wagering contract.
c) Principle of uberrimae fidei - Under ordinary law of contract there is

no positive duty to tell the whole truth in relation to the subject-matter
of the contract. There is only the negative obligation to tell nothing but
the truth.
In a contract of insurance, however there is an implied condition that each
party must disclose every material fact known to him.
This is because all contracts of insurance are contracts of uberrimea fidei,
i.e., contracts of utmost good faith.
This is because the assessment of the risk and the determination of the
premium by the insurer depends on the full and frank disclosure of all
material facts in the proposal form.

INSURANCE COMPANY
4. HOW INSURANCE COMPANY OPERATES:
<
② Payment of Premium
Insurance
①
Policy
¥¥¥
(
< >
Co .
¥
limner)
Unsigned)
③ Claim ,
in event
loss
Investment of
of funds
need .cn
premium
[ Investment Income]

INSURANCE COMPANY
# GENERAL INSURANCE BUSINESS:
1. Procurement of Business:
✓ ✓
Direct Business Reinsurance Co-insurance
+
Procurement of business
A. Direct business -
through agents
② Pay premium
L
① liaoning
④ Payment #
Insurance
Co Of COMM
, Agents on
behalf? §
of Imco
[ Insured)
.
( Insured
7 7
③ Issues
policy document
⑤ Claim
ineueaeoflo
2 . Reinsurance 3 .
Coinsurance
Reinsurcededance
,
① Pap
Premium
lead
insurer
1m01
Ummer)
②
Comm:
>
ssion
Agent ¥
arrived)
(1m61
< ①Pap Premium
o
Policy issued
> +
③ im.cz Policy A
a
+
limned)
1m .az
Reinsurance a) lmloogwillpayprem ,
l murers1@paymenpofcHiMReiFpiedKisktrfdyb11m.Co
to 1m Coz
.
willseceive
g.
✓
10mm Prem Income , claimed Comm income .
fmmlm.AZ
.
1mHz
-
to be distributed amonglmco.in
Ummer ) 105511m -101
e) in event of ratio of risk undertaken .
NAVIN CLASSES will receive claim from CA AVINASH SANCHETI

1m Coz .
.
INSURANCE COMPANY
2. Computation of Premium Income:
Particular Amount 1£)
Premium
(
1.
from Direct business XXX
H2 .
n n coinsurance business xxx
1+13 .
• •
Reinsurance accepted xxx
f) 4 . or
for Reinsurance ceded l
}
Net Premium Income
* Opening reserve
for unexpired risk ?
l✗✗X)_
"
⇐ Closing
n
n n
Prem inctsfdtopll :) #
A Note: Reserve for unexpired risk: ( Pre recdlncomeisameon Rotation
bills disc ]
This is applicable in General Insurance business only. This is in the nature of
provision for claims that may arise in respect of policies which are
subsisting on the date of balance sheet. Since premium has already been
received in respect of such policies, provision must be made for the claims
that may arise out of such policies.
Insurance business is peculiar in that the premium is received in advance but

the risk can arise on any day.
Therefore, insurance companies must provide for the risks associated with
all such policies for which the premia has been received and the policies are
still in force. Thus a large portion of the premia collected must be kept in
reserve for unexpired risk.
Keeping in view the nature of the business, the Executive Committee of the
General Insurance Council has laid down that in the case of marine
insurance the provision for unexpired risk should be 100% of the net
premium and in the case of other businesses (like accident, fire, theft, etc.)
the provision should be 50% of the net premium.

INSURANCE COMPANY
Journal entries:
a) Closing Reserve for unexpired risk:
Prem .
Inc . A/ c-M
TO Reserve for une Oisk Ak

xp .
b) Opening Reserve for unexpired risk:

Reserve
for vneyp
.
Risk Aliw
to Prem Inc .
A/c

INSURANCE COMPANY
3. Computation of Claim expense:
The business of an insurance company is to cover the risk of the insured
for a consideration called premium. If the risk falls on the insured then he
makes a claim on the insurance company.
This is the first item which appears on the Expense side of revenue account.
Particulars AMICI )
Claims
paid ( Direct + coins ) . ✗✗ ✗
* claims paid on reins .
accepted ✗✗ ✗
y n seed a n ceded C✗x✗)_
✗✗✗
f) U 01s claims
- ✗✗✗
4 Op 01s claims
.
Lxxx )
Net claim Ex
* ☒ Expense related to claims xxx
8¢ leg surveyor's fees legal exp )

.
claim
epptrfdtokev.ae #
the " "" " intimated
• ""me
" "M"d When
'
'
whether or not
accepted or
paid .
Important points:
a) It should be noted that in keeping with the convention of conservatism,
the claim intimated is taken at par with the claim intimated and accepted but
not paid. Thus while calculating the claim outstanding at the endI the claim
intimated as well as the claim intimated and accepted both are considered.
b) Claims must include all expenses directly incurred in relation to

assessment of claims. For examples expenses like survey fees, fees of Police
Reports, Legal fees, Court expenses and other similar charges should be
included under the head claims.

INSURANCE COMPANY
4. Computation of Commission expense:
Particulars Amt
Comm .
on direct business XXX
n n reins .
accepted ✗✗ ✗
* n n n ceded
Note
. Op 01510mm
.
.
shall be deducted
shall be added
a. Ofs n .
5. Format of Revenue Account (Form B-RA):

Insurance Company Name
Revenue Account
for the year ended …
{ Pt.
{ Cco
Important points:
a) Revenue Account is to be prepared separately for each type of General
Insurance Business.
b) Items of expenses in excess of one per cent of net premium or Rs. 5 lakhs,
whichever is higher, shall be shown as a separate line item.

INSURANCE COMPANY
6. Format of Profit & loss Account (Form B-PL): Not relevant
for exams
Profit & Loss Account

:
O
/ / / /

INSURANCE COMPANY
# LIFE INSURANCE BUSINESS:
1. Types of Life insurance policies:
a) Whole life policy - Under whole life policy the insured does not get
the amount during his life time. The amount is paid only to his nominees
or heirs on his death.
b) Endowment policies - In the case of Endowment policy the amount is

paid to the insured on his attainment of a specified age or if he dies
before, the amount is paid to his nominees or heirs.
c) Annuities - Annuity refers to fixed annual payment made by the

insurance company to the insured on his attaining a specified age. The
insured deposits lump sum amount by way of consideration for the annuity
granted. This is a method under which the person purchasing the annuity
receives back his money with interest.

INSURANCE COMPANY
2. Format of Revenue Account (Form A-RA): Don't learn
÷
Revenue Account
Claims
( PIL Alc )

INSURANCE COMPANY
$ 3. Concept of Life Assurance fund: Revenue Alc )
☒
This represents the excess of revenue receipts over revenue expenditure
relating to life business. The fund is available to meet the aggregate
liability on all policies outstanding. Revenue Account is prepared every
year to ascertain the balance of life insurance fund at the end of the
year.
In the preparation of Revenue Account, the opening balance of the life

insurance fund is the starting point. Other items of revenue income are
credited to the fund and revenue items of expense are debited. The
resulting figure is the closing balance of the revenue fund.
Assurance Fund :
life
Op . bat .
of LAF :
✗✗
Rev . Incomes 2
✗✗
⇐ Rev .
exp . e-
1×7
a. bat
of LAF :
I

INSURANCE COMPANY
4. Concept of Valuation Balance Sheet:
§ The balance in the life assurance fund cannot be taken as the profit made
by the life insurance business. For the purpose of ascertaining the profit,
the insurance company should calculate its net liability on all outstanding
policies.
For calculating net liability, the actuaries calculate the present value of
future liability on all the policies in force as well as present value of
future premium to be received on policies in force. The excess of the
present value of future liability over the present value on future premium
is called the net liability.
It is by comparing the life insurance fund and net liability in respect of

policies, that profit in respect of life insurance business can be
ascertained. The profit or loss of life insurance business is ascertained by
preparing a statement called ‘Valuation Balance Sheet’.
According to Section 28 of the Life Insurance Corporation Act, 1956, 95%

of the profit of life business must be distributed to the policyholders by
way of “Bonus” on with-profit policies and the remaining 5% has to be
utilized for such purposes as the Government may determine.
valuation Mls
fund
Netliab -
on 01s policies xxx

life anvdance ✗✗✗
loss
Profit ✗✗ ✗ xxx
ILAF > Netlidb] [LAFL Netliab)
= -
Nettiab :(Prof future claims ⇐ Prof future premiums]

→ 9% on bonus to policyholders
pnyih →
5% to shareholders -

INSURANCE COMPANY
5. BONUS TO POLICYHOLDERS: Imp fun theory
.
It is nothing but the share of profit which is payable by the insurance

company to the policyholders. Bonus may be of three types:
a) Cash Bonus - in
policyholders
Bonus
paid contr to the .
b) Revisionary Bonus - Bonus

paid at the time
of maturity
1mi
of policy in cmh .
two
c) Interim Bonus - Bonus dates
paid 61W the
of Halvah
'
on
BK .
d) Bonus in reduction of Premium - Bonus paid to policyholder in

the form of reduction of future premium Amt
payable by policyholder .

INSURANCE COMPANY
6. Format of Profit & Loss Account (Form A-PL): ( Don't lean
)
Profit & Loss Account


* Electricity




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CMA INTER COMPANY ACCOUNTS NOTEBOOK

a) I, CA Avinash Sancheti, present to you this Notebook cum summary module

c) The module also covers the important theoretical aspects of chapters so

NAVIN CLASSES CA AVINASH SANCHETI

b) Question 2 to 5 - Subjective type (12 marks each)

b) Question 2 to 4 - Subjective type (12 marks each)

NAVIN CLASSES CA AVINASH SANCHETI

Sl. No. Chapter Marks Type of Qs

NAVIN CLASSES CA AVINASH SANCHETI

poor of Companies Act .

b) limited liability of members

3. LAWS APPLICABLE TO A COMPANY:

listed entity financial sectoral other Tax

NAVIN CLASSES CA AVINASH SANCHETI

a) Commercial papers a) Shares

NAVIN CLASSES CA AVINASH SANCHETI

6. TYPES OF SHARE CAPITAL:

shares other than preference will have the

b (a) Fixed late

fixed maturity ie they

will be redeemed at the end

b) Issued Share Capital: It

c) Subscribed Share Capital: refers

subscribed by the public / investors d allowed to them .

[shares attuned ☒ I face value]

d) Called up Share Capital: the

shares allotted Called up portion

paid by the shareholders is called paid up sh Cap .

NAVIN CLASSES CA AVINASH SANCHETI

(b) It is an instrument which a co .

b) Repayment of principal at the end of specified

c) Priority repayment at the time

1.d) No voting rights .

NAVIN CLASSES CA AVINASH SANCHETI

NAVIN CLASSES CA AVINASH SANCHETI

ISSUE & FORFEITURE OF SHARES ( 2- 3 monks)

Issue at Par Issue at Premium Issue at Discount

d issue Price : £-8

face value : £-10

Issue Price : £12

NAVIN CLASSES CA AVINASH SANCHETI

When shares are issued at a premium, the premium amount is credited to a

Securities premium Account is shown under the heading, “Reserves and

According to Section 52 of the Companies Act, 2013, Securities Premium

P - writing off preliminary exp .

P- Writing off Premium

AS under section it cannot

SP for two P 's .

NAVIN CLASSES CA AVINASH SANCHETI

prospectus is circulated to the public

Excess money can be (390%1 490^1)

(Proraha) Allor shares Refund

G. calls the balance money

NAVIN CLASSES CA AVINASH SANCHETI

cos Act → b-i.

of shares atoned ✗ Appt i. money / Sh )

Equity share App .

d) Allotment money called up:

To kq.sn Capital A/c .

e) Allotment money received:

f) 1st Call/Final Call money called up:

g) Call money received:

NAVIN CLASSES CA AVINASH SANCHETI

Such amount represents the uncollected amount of capital from the